The Australian dollar (AUD) traded 0.65% lower at 0.6985 against the US dollar (USD) during Asian trade on Monday. The AUD/USD pair is facing intense selling pressure as risk assets face the simmering heat of oil prices, escalating war in the Middle East involving the United States (US), Israel and Iran.
S&P 500 futures were down more than 2% in early trade, reflecting the bearish sentiment in the market. The U.S. dollar index ( DXY ), which tracks the greenback against six major currencies, rose more than 0.7% to near 99.60, returning to its highest three-month high.
According to the BBC, the price of WTI oil rose more than 25% in Asian trading, after several Iranian oil depots were hit overnight in a joint operation between the United States and Israel, above $110.
A rise in oil prices is a negative scenario for riskier currencies, given that higher energy prices lead to more foreign capital outflows from economies.
Regarding the rise in oil prices, US President Donald Trump, through an article on Truth.Social, stated that it is a “very small price” to insure Iran against building a nuclear facility, which could have far greater consequences.
In the US, investors will focus on the US consumer price index (CPI) data for February, which will be released on Wednesday. The impact of February inflation on expectations about the outlook for the Federal Reserve’s (Fed) monetary policy will be limited, as it will not be affected by the rise in oil prices during the Middle East war.
(This story was amended at 03:15 GMT to initially say AUD/USD is down 0.6% to near 0.6985, not 6%)
Questions about risk perception
In the world of financial jargon, two widely used terms, “risk” and “risk-on,” refer to the level of risk that investors are willing to stomach over a specified period of time. In a “risk-on” market, investors are optimistic about the future and are willing to buy risky assets. In a “risky” market, investors begin to “play it safe” because they are worried about the future, and therefore buy less risky assets that they are more confident will pay off, even if it is relatively modest.
Typically, during “risk-on” periods, stock markets will rise, most commodities, except gold, will also appreciate as they benefit from positive growth prospects. Currencies of countries that are heavy commodity exporters are strengthening due to increased demand and cryptocurrencies are rising. In the “risk-on” market, bonds – especially major government bonds – are gold, and safe-haven currencies such as the Japanese yen, Swiss franc and US dollar are all benefiting.
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and smaller currencies such as the Ruble (RUB) and South African Rand (ZAR) are all rising in markets that are “risky”. This is because the economies of these currencies rely heavily on commodity exports for growth, and commodities tend to rise in price during periods of risk. This is due to the fact that investors anticipate the demand for raw materials in the future due to the increase in economic activity.
The main currencies that rise during “risk-on” periods are the US dollar (USD), the Japanese yen (JPY) and the Swiss franc (CHF). The US dollar, because it is the world’s reserve currency, and because in times of crisis, investors buy US government debt, which is considered safe, because the world’s largest economy is unlikely. Yen, from increased demand for Japanese government bonds, because a high share is held by domestic investors, who are unlikely to dump them – even in a crisis. Swiss Franc, because strict Swiss banking laws offer investors complete capital protection.
